As Woodside Petroleum grapples with challenges at its three growth projects, a fourth option could provide an answer.
As Woodside Petroleum grapples with challenges at its three growth projects, a fourth option could provide an answer.
A LITTLE more than two years ago, Woodside Petroleum’s (then) chief executive Don Voelte sat down to talk investors through a bold new growth strategy for the company.
With construction of Woodside’s new Pluto liquefied natural gas project well under way, the first questions were starting to be asked about just where the company was going to source the gas to support the addition of two more LNG trains, or processing lines, to the project.
Mr Voelte’s response was to tackle
those doubts with his signature emphatic confidence.
Not only would Woodside eventually build three trains at Pluto as promised, Mr Voelte said a reconfiguration of the project meant the company could now squeeze in up to five LNG trains at the site.
The big thinking did not stop there.
The analysts, investors and media listening to that talk didn’t know it at the time, but Woodside’s lobbying efforts to Canberra were shoring up another massive growth option – the huge Browse project off northern Western Australia. By the end of the year, the federal government would, at Woodside’s behest, attach strict conditions to the Browse project’s retention licence that would effectively order the minority joint venture partners in Browse to fall-in behind and support Woodside’s aggressive development plans.
A project that had long been delayed by differing opinions among its owners – Woodside wanted a dedicated LNG processing plant built on the northern WA coast, while the minority partners preferred for the gas to be piped south and used to eventually top up supplies into the existing North West Shelf LNG project – seemed to finally be on an inexorable path towards development.
Also in the background, Woodside was advancing studies into the third element of its growth strategy – the Sunrise gas field between Australia and East Timor – which would eventually select Royal Dutch Shell’s floating LNG technology as the best development option for the project.
More than two years on, a lot has changed at Woodside.
Mr Voelte, for one, has gone, returning to his native US earlier this year. Melbourne-born Peter Coleman is now in charge, having left ExxonMobil to take up the role.
Multiple cost blow-outs and delays at Pluto’s first train have proved a big reality check for Woodside and its investors, raising questions about the gung-ho development strategy advocated by Mr Voelte.
Adding another layer of interest to proceedings has been Royal Dutch Shell’s decision to begin selling down its 34.3 per cent stake in Woodside, putting the company back into play as a takeover target for the first time since Shell’s unsuccessful 2001 tilt.
On the other hand, some things haven’t changed.
Despite having carried out the biggest ever oil and gas exploration campaign in Australian waters, Woodside still doesn’t have enough gas to support the addition of another train at Pluto.
Additional trains can dramatically improve the economics of an LNG project, as they can leverage off billions of dollars worth of infrastructure built to support the original development. But investors don’t hear any talk about a fourth and fifth train at Pluto anymore. Instead, the focus is on whether the project can support a second, let alone a third, train.
Browse continues to be dogged by uncertainty over whether or not Woodside’s preferred plan for a stand-alone LNG plant at James Price Point near Broome is the most sensible option, and the partners are battling increasingly stiff opposition from environmental groups.
Sunrise’s fate also remains unclear, with the East Timorese government adamantly opposed to any development option that does not include LNG processing on East Timor soil.
Most analysts are applying heavy discounts to their valuations on Browse, Sunrise and the Pluto expansion, owing to the uncertainties hanging over each project.
Given all three key projects that make up Woodside’s growth strategy seem to be either delayed, inhibited or becalmed, there have been growing expectations that Mr Coleman’s appointment could provide an ideal time to reassess the company’s plans.
Mr Voelte’s 2009 plan for five trains at Pluto is a prime example of the optimism and ambition that helped him reinvent Woodside as an aggressive, agile and independent oil and gas company; but it has also left his successor facing a choice between lowering investor expectations or fighting to deliver on promises that now appear unrealistic.
If indeed Mr Coleman does plan to overhaul Woodside’s growth plans, he may well find a solution to some of his headaches in Mr Voelte’s bullish five-train plan at Pluto.
To date, the debate around Pluto’s expansion has focused on two sources of gas: that found by Woodside during its recent exploration campaigns; and that already found in the region by third parties, such as Hess and the Scarborough joint venture of ExxonMobil and BHP Billiton.
Similarly, two options are debated at Browse: James Price Point; and a 1,000-kilometre pipeline linking the field to the existing North West Shelf facility.
Woodside, BHP, BP, Shell and Chevron are all partners in both Browse and the North West Shelf, and gas supplies into the latter could well start to slide towards the end of this decade.
Having pumped billions of dollars into the North West Shelf infrastructure over the years, the partners will be reluctant to see that head towards underutilisation while being asked to stump up billions more for a new LNG plant to the north.
The new option, which has not previously been part of the public debates over Pluto and Browse, would be to scrap the James Price Point plan and pipe the gas south – but not into the North West Shelf. Instead, the Browse partners could use the vacant sites at Pluto to build their new trains.
The pipeline would be a large additional cost over the James Price Point option, but the Pluto trains would benefit from leveraging off the infrastructure already in place. Building additional trains at Pluto would be a much cheaper option than starting from scratch at James Price Point; analysts have estimated that each additional train at Pluto could cost around $6 billion, compared to an estimated $35 billion development for a three-train project at James Price Point.
Piping Browse gas south to Pluto would bypass the potentially lengthy environmental approvals process, given the necessary permits are already in place at Pluto, and extricate Woodside and its partners from the potentially messy conflict with environmental campaigners in the Kimberley.
It would also help the company and its shareholders avoid the pain of seeing rivals compete against the Browse partners for labour and customers while piggybacking on the Pluto infrastructure built by Woodside at great expense.
Competition for employees is a major issue facing the growth of Australia’s LNG industry, with over a dozen projects under construction or nearing a final investment decision, while the fight for customers is likely to intensify as more projects enter production.
At present, the other gas field owners negotiating with Woodside will feel their bargaining position has been strengthened by the fact they appear the only real option for Pluto’s expansion. Browse gas would turn that situation on its head.
One of the key hurdles in bringing Browse’s gas to Pluto would be determining the equity structure, given Woodside currently owns a 90 per cent stake in the project, although that is a problem that equally applies to reaching a deal with the other resource owners in the area. Woodside has previously flagged tailoring the equity structures in each train at Pluto to reflect where the gas has come from, and that approach would simplify any discussions over bringing Browse to Pluto.
At present, the Browse partners are midway through an exhaustive front-end engineering and design (FEED) study that, when complete, will provide them with the most definitive insights into the pros, cons and cost of developing James Price Point.
It will likely require a hefty case of sticker shock for Mr Coleman to seriously entertain other options.
UBS analyst Gordon Ramsay believes Browse is most likely to be developed through James Price Point, with Pluto to be expanded using a combination of Woodside’s own gas from the area and gas from other resource owners.
“The joint venture has already decided to go with James Price Point. They’re spending money on FEED to fine-tune the cost of doing that,” Mr Ramsay told WA Business News.
“If they go through that process and find it’s $50 billion to build at James Price Point, then maybe there’s a re-think of what they do with that project. But at the moment the decision has been made.”
After Mr Coleman’s first results briefing back in August, Merrill Lynch analyst David Heard noted a subtle change in Woodside’s language around the government-mandated target of a final investment decision on Browse by 2012, with the commentary now making it sound more like an obligation than an opportunity for Woodside.
“We see a possibility of Woodside backing away from [a] greenfield Browse development, at least without further exploration and resource growth,” Mr Heard said in a research report at the time.
So is there any chance of Mr Coleman committing to such a dramatic change?
All the indications from Mr Coleman during his tenure to date are that he will be thorough, measured and considered. It is those traits that have helped forge ExxonMobil’s first-rate reputation for project delivery, and it is those traits the Woodside board would have been craving when they decided to appoint him as Mr Voelte’s successor.
Execution is going to be more important than headlines to Mr Coleman, and for that reason he is unlikely to deviate too dramatically from the current Browse plan just yet.
But there’s no doubt he will take his time to be sure the path he eventually chooses is the best one.
